Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Thursday, August 04, 2011

House Legislation Would Broadly Restructure the SEC

House Financial Services Committee Chairman Spencer Bachus (R-Ala) is drafting legislation to restructure the SEC and implement reforms recommended by the SEC’s Inspector General, the GAO, and a consultant’s report mandated by the Dodd-Frank Act. The SEC Modernization Act is designed to make the SEC more efficient, consolidate duplicative offices, enable the agency to use better technology, and strengthen ethical safeguards to avoid conflicts of interest.

Chairman Bachus emphasized that the reform draft should not be interpreted as criticism of SEC Chair Mary Schapiro or any of her predecessors. Rather, it is the structure of the agency itself that is flawed, said the House oversight Chair, and Congress has only increased its dysfunctional structure through fragmentary and piecemeal amendments rather than the comprehensive reform that is needed.

The Act would consolidate duplicative offices. It would amend Dodd-Frank Act Section 965 to consolidate the SEC Office of Compliance, Inspections, and Examinations into the Division of Trading and Markets and Division of Investment Management (IM). A new Office of Compliance, Inspections, and Examinations would be created within Trading and Markets and Investment Management to house all examination, inspection, and compliance staff. Each new office would have a deputy director who would report to their respective Division director. The SEC’s regional offices would report to the Division of Enforcement, the Division of Investment Management, and the Division of Trading and Markets.

Similarly, Section 965 would be amended to consolidate the Division of Risk, Strategy and Innovation and its employees into the Divisions of Corporation Finance, Enforcement, Investment Management and Trading and Markets. A new Office of Risk, Strategy and Innovation would be created within the four remaining SEC divisions. Each office would have a deputy director who would report to their respective Division director. The Act decouples the SEC’s Chief Economist and the Division of Risk, Strategy and Innovation since the legislation eliminates this Division. The Chief Economist would then report to the SEC Chairman.

Dodd-Frank Section 342 would be amended to consolidate the pre-existing SEC Office of Equal Employment Opportunity into the newly established Office of Minority and Women Inclusion. The Office of Equal Employment Opportunity would have a deputy director who reports to the Director of the Office of Minority and Women Inclusion. Section 915 would be amended to consolidate the Office of the Investor Advocate as established by Dodd-Frank and integrate its functions into the preexisting SEC Office of Investor Education and Advocacy. The Investor Advocate would be a deputy director who reports to the Director of the Office of Investor Education and Advocacy.

The legislation would effect a number of managerial and ethics reforms. It would combine the functions of the existing SEC Executive Director into the functions and role of the existing SEC Chief Operating Officer (COO). In light of recent questionable ethics guidance, the SEC Office of Ethics Counsel must memorialize guidance provided to all SEC employees. Those records and memos must be made available to the SEC Inspector General if an investigation so demands. Also, the SEC Chairman must annually submit in writing the agency’s agenda for that year to the Committee on Financial Services and the Senate Banking Committee.

The Act would codify that the SEC Inspector General is an independent office within the Commission that reports directly to the Chairman. The Office of the Chairman will expand to be composed of the COO, the Office of General Counsel, the Secretary, and the Chief Accountant. Also, the Offices of International Affairs, Legislative and Inter-Governmental Affairs, and Public Affairs would be consolidated into a new Office of External Affairs. External Affairs will also be housed within the Office of the Chairman.

Under the legislation, the following SEC offices would report to the COO: Office of Acquisitions; Office of Administrative Services; Office of Financial Management; Office of FOIA, Records Management, and Security; Office of Human Resources Office of Information Technology; Office of Interactive Disclosure; Office of the Administrative Law Judges.

In order to deal with the revolving door issue and avoid potential conflicts of interest within the Commission after employees leave employment, the SEC Office of Ethics Counsel must develop a system of documenting employee recusals. To accomplish this goal, the SEC must establish a database to document recusals and to identify potential conflicts of interest by documenting matters for which the employee was personally and substantially involved while an SEC employee.

Although the Dodd-Frank Conference Committee adopted an amendment offered by Capital Markets Subcommittee Chair Scott Garrett (R-NJ) to create an independent SEC Ombudsman in Section 919D, this provision was altered by the Senate Conferees to have this new ombudsman report to the Office of the Investor Advocate, which, according to Chairman Bachus, negates the entire function of an ombudsman to interact with market participants without fear of reprisal by SEC staff. ‘

The legislation would restore the Garrett Amendment and establish the ombudsman as an independent office reporting directly to the SEC Chair. As Dodd-Frank confers new prudential regulatory authorities to the SEC, said the oversight Chair, the SEC needs to emulate the prudential regulators and have an independent ombudsman to receive complaints and questions from regulated entities.

Dodd-Frank Section 911 established the SEC Investor Advisory Committee. Reforms to this provision would include limiting the term of service for Committee members to one-term of five years, which shall be staggered, for all new Committee members who replace the current members.

Finally, Dodd-Frank Section 991 authorized a $100 million reserve fund funded by SEC fees for use by the SEC “as the Commission determines necessary.” The legislation would amend this section to allow the SEC to only use this reserve fund to make badly-needed agency technology improvements.